Credit Suisse Rolls Out Market Neutral ETN

Credit Suisse continued the expansion of its ETN lineup on Wednesday, debuting a product that offers market neutral exposure to equity markets of the U.S., Europe, and Japan. The new Market Neutral Equity ETN (CSMN) will be linked to the HS Market Neutral Index Powered by HOLT, a benchmark that includes equal long and short positions in stocks from a handful of different developed markets.

The underlying index selects stocks from a universe of the 275 largest North American stocks, 300 largest European stocks, and 175 largest Japanese stocks. Using the HOLT scoring methodology, 75 long positions and 75 short positions are determined, with each stock assigned a base weight of about 1.33% (or -1.33%) in the benchmark. In determining which stocks qualify for both long and short allocations, the HOLT methodology considers whether stocks appear to be overvalued or undervalued, stock market momentum, and corporate performance factors.

The index methodology involves breaking the universe into sector and region “buckets” as well, a feature that will result in sector and market neutrality. In other words, CSMN won’t simply be a bet on the relative performances of various sectors or regions; it will include long and short positions across regions and across different industries [see all the Long-Short ETFs here].

Inside CSMN

HS Market Neutral Index

S&P 500

Avg. Month

0.24%

1.33%

Best Month

2.22%

8.76%

Worst Month

-1.34%

-5.68%

1-Year Return

1.70%

9.62%

Annualized St. Dev.

3.73%

19.17%

Sharpe Ratio

0.42

0.49

Source: Credit Suisse

Because CSMN maintains equal long and short positions, it should be expected to exhibit very low volatility and correlations to global equity markets. Moreover, the strategy has the potential to deliver gains in any type of environment, since the value will be derived from the performance differentials between individual securities.

So products such as CSMN may have appeal for investors looking to add diversifying agents to traditional stock-and-bond portfolios, potentially smoothing overall volatility while maintaining the potential to generate alpha in both bull and bear markets [take a Closer Look At Hedge Fund ETFs].

“We believe market neutral strategies continue to garner interest from advisors for their risk/return profile and low correlation to market conditions,” said Greg King, Head of Exchange Traded Products at Credit Suisse. “By providing the first market neutral strategy in an ETN format, we are helping investors to efficiently tap into alternative investment strategies.”

In the year ended September 15, the index to which CSMN is linked had an annualized standard deviation of just 3.73%–less than a quarter of the similar metric for the S&P 500 Index.

Market Neutral ETF Boom

Credit Suisse is hardly the only issuer that has been active in developing ETPs that tap into alternatives; including funds offering exposure to volatility, there are now more than 50 alternatives ETFs on the market. QuantShares recently rolled out a lineup of seven market neutral ETFs that segment the equity market based on factors such as momentum and beta, and a handful of other firms offer up products that maintain market neutral exposure as well [analyze the lineup of Long/Short ETFs].

Credit Suisse already offers a Long/Short Liquid Index ETN (CSLS) that also offers both long and short exposure. That ETN takes more of a high level approach; instead of assigning weights to individual stocks, the underlying index takes long and short positions in a basket of liquid market factors such as the S&P 500 Index or MSCI EAFE Index [also see The Definitive Guide To 130/30 ETFs].

Other long/short ETPs include the RAFI Long/Short (RALS) from ProShares, which assigns weightings to individual stocks based on discrepancies between their market cap weight and “RAFI weight.”

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